Equity selling apartment biz in hot market

With investors bidding up prices of apartment buildings, Equity Residential may have picked the right time to sell its Lexford business, a 27,390-unit portfolio that is expected to fetch $1 billion or more. The problem: how to reinvest proceeds in a seller's market.

Finding good deals will be tough even for a savvy buyer like Chicago-based Equity, a real estate investment trust (REIT) whose chairman, Sam Zell, is famous for his ability to spot undervalued assets.

Equity has been active on both sides of the market: selling properties in slow-growing cities where it's easy for developers to build more apartments, and buying in cities with higher growth prospects and a shortage of developable land.

Not including Lexford, Equity aims to sell 50 properties, encompassing 14,009 units in states such as Florida, Maine and Ohio. It is selling all eight of its Chicago-area buildings. Including Lexford, which comprises 299 properties, 21% of Equity's 197,000-unit portfolio is on the market now.

GROWTH STRATEGY

Equity sold $1.4 billion in apartment properties in 2005 and spent $2.5 billion on acquisitions in places like Seattle and New York.

"We'll continue to reduce the number of markets in which we operate," Equity CEO David Neithercut told analysts on a conference call last month, according to a transcript. "We will continue to focus on those markets with growth forecasts . . . that exceed the national average and with barriers to entry (for developers) and high costs of single-family homes."

Investors seem to like the strategy. Equity shares have risen 36% over the past year, matching the Bloomberg REIT Apartment Index.

But rising apartment prices mean the returns on properties Equity buys, at least initially, are likely to be lower than the returns on properties it sells, diluting earnings. That isn't a huge concern, as long as the acquisitions pan out over the long run, analysts say.

Equity acquired Lexford in 1999. The properties are in 10 states, mainly in the Southeast and Midwest. They're generally older and of lower quality than the rest of Equity's portfolio: The average rent is 92 cents a square foot, vs. $1.08 for Equity's other properties, according to Green Street Advisors Inc., a California research firm.